Leiden Law Blog

“Assignment” of tort claims: a simple word, but a myriad of aspects and effects

When it comes to the assignment of personal tort claims, constraints result from the doctrine of champerty and maintenance in common law countries. Compared to this approach, civil law countries do not know these doctrines. Hence, they do not face any difficulties in connection with the assignment of tort claims to third parties. However, after studying some court decisions in these four countries, two different markets regarding assignments could be recognised: on the one hand, a “market for third-party funding” and on the other hand, a “market for legal claims” has emerged. Whereas the former includes security assignments and debt collections, the latter comprises “real” assignments or rather sales:

By using an assignment for security purposes, the claim is usually assigned to a third-party funder. This is often done in Germany and Austria together with a procedure-funding contract and does also not cause any difficulties in common law countries. As the claim owner (the assignor) retains control over his or her lawsuit, champerty does not apply. Only the payment which he or she owes the assignee should be secured. While these legally realise an assignment, this does not hold true when it comes to the economic effect. The payment takes place ex post, i.e. after the positive ending of the lawsuit.

This approach also applies to the assignment for debt collection, which is used in order to realise a sort of “class action” in Germany and Austria. The claim is assigned to an organisation, to the economically strongest plaintiff, or to a special purpose vehicle (SPV), which sues on his or her behalf and/or on behalf of a number of other persons. The risk of the procedure and of its costs usually falls on the assignor, who also has the last word on the procedure and receives any profit, minus the fee for a SPV. As a result, this does not seem to be “a ‘regular’ assignment, but an assignment for the primary purpose of debt collection”. As far as can be seen, there is no indication of any comparable instrument under the regimes of common law. The reasoning behind this seems to be the old doctrine of champerty. However, in the US, the “classical” country of class actions, there was no need for such a “substantive law” mechanism. As far as England is concerned, a collective action for certain competition law damages was introduced by the Consumer Rights Act 2015.

By undertaking a sale or a full assignment, the seller or assignor is paid ex ante (i.e. immediately, and the amount depends on the expected sum to be awarded) and the control of the lawsuit is shifted to the buyer or assignee. The new owner can file the claim at the court but he might also be allowed to trade the claim as a security by trying to get a higher price from a second buyer or assignee. Such a “speculation” seems to be doable according to the Austrian and German Civil Codes. Compared to this, the US forbids it for personal tort claims since a stranger should not be allowed to make the decisions about the case and benefit therefrom. Similarly, in England, problems arise if the assignee does not have a genuine commercial interest in the assigned claim.

As a result, whereas a “market for third-party funding” does not give rise to any substantive difficulties in common and civil law, only the latter seems to be open for a “market for legal claims”. However, there has not been – as far as can be ascertained – a German or Austrian court decision dealing with the full abandonment of the control over one’s lawsuit. Hence, there is still a risk that this might also violate public policy under certain circumstances.